austin checklist - AUSTIN GLADSTONE VALUATION SUGGESTIONS...

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Unformatted text preview: AUSTIN GLADSTONE VALUATION SUGGESTIONS & CHECKLIST
Here is a checklist of items you need to address. There may be more items, not listed here, that
you need to address. You may this or a similar table in your report if you wish.
Item
What CoD for tax shields
What risk-free rate
What beta for operations
What market risk premium
What unlevered CoE
What levered CoE
(do you need one)?
Single rate or rates for each year?
What marginal tax rate?
Net Working Capital
Capital Expenditures
Treatment of dividends received U.S. U.K. Terminal Value
Cash flow –Operations
–Tax shields Growth Rate for TV:
Real
Expected inflation
Convert to US$ First and Then Value?
What FX rates to use?
What risk free rate?
What CoE(u)?
What CoD?
Value in local currency and Then Convert to US$?
What FX rates to use?
What risk free rate?
What CoE(u)?
What CoD?
Debt
What is the book value of the debt?
What is the market value of the debt?
Balance Sheet Items
Ignore the book or market value of the reserves?
Add the value of the reserves to the PV of future cash flows?
Add all/some/none of the short-term assets to the PV of future cash flows?
Subtract all/some/none of the short-term liabilities to the PV of future cash flows?
Add all/some/none of the long-term assets to the PV of future cash flows? This case provides you with all sorts of information that you may or may not need. 1 AUS One of the choices you need to make is whether to translate the cash flows and then value them
using the $ CoCs or whether to value the cash flows in the local currency and ten translate them
into $s.
We discussed in class alternative ways to obtain local currency CoCs. On method proposed is to
convert the $ CoCs to foreign-currency CoCs by using the IRP. A property of this type of
conversion combined with the IAPM is that when betas are measured with respect to the World
Market portfolio, they are invariant to the currency in which the calculation takes place.
Consider, CoE$ = R f ,$ + β j ,$ ERPW ,$ , and CoE fc = R f , fc + β j , fc ERPW , fc . Use the IRP method to get an alternative measure of CoEfc:
⎛ 1 + i fc ⎞
⎟
1 + CoE fc = (1 + CoE$ )⎜
⎜ 1 + i ⎟ = 1 + R f ,$ + β j ,$ ERPW ,$
$⎠
⎝
⎛ 1 + i fc ⎞
⎛ 1 + i fc ⎞
⎟ + β j ,$ ERPW ,$ ⎜
⎟
1 + CoE fc = 1 + R f ,$ ⎜
⎜ 1+ i ⎟
⎜ 1+ i ⎟
$⎠
$⎠
⎝
⎝ ( ( ⎜
⎟
)⎛ 1 + iifc ⎞
⎜ 1+ ⎟
⎝ $ ⎠ ) ⎛ 1 + i fc
The first term is just the fc interest rate from CIRP: CoE fc = R f , fc + β j ,$ ERPW ,$ ⎜
⎜ 1+ i
$
⎝ ⎞
⎟.
⎟
⎠ Now consider the World Market portfolio itself; its beta must be 1.00, regardless of which
⎛ 1 + i fc ⎞
⎟
currency the measurement takes place. It follows immediately that, ERPW , fc = ERPW ,$ ⎜
⎜ 1+ i ⎟ ,
$⎠
⎝
and β j , fc = β j ,$ .
This would not be true for a multifactor IAPM, unless all the factors used in each country were
the same!
Another issue you need to tackle is whether or not to add Balance Sheet items, like oil, gas, and
coal reserves, to the Present Value of cash flows, when evaluating the going-concern value of an
enterprise. The following general rule applies to all items on the Balance Sheet.
If the item in question is integral to the process of manufacturing and sales, so that its existence
and quantity contribute to the projected cash flows, then its value is implicit in the future cash
flows and it should not be added (it would be double-counting). All items that do not fit this
description should be added. 2 ...
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